DECISION
1. Eric
Newman Developments Limited appeals against decisions made under section 8,
Social Security Contributions (Transfer of Functions etc) Act 1999 and
determinations made under regulation 80, Income Tax (PAYE) Regulations 2003.
2. Details
of the decisions and determinations are as follows
|
Tax
Year
|
Income
Tax (Reg 80) (£)
|
NICs
(section 8) (£)
|
|
2004/05
|
286.92
|
387.29
|
|
2005/06
|
1971.86
|
1774.19
|
|
2006/07
|
2449.10
|
2123.14
|
|
2007/08
|
1238.30
|
1000.38
|
|
2008/09
|
2307.00
|
2037.50
|
3. The
decisions and determinations were made on the basis that the engagement of
David Filipiak by the Appellant was one of employment. Payments made by the
Appellant to Mr Filipiak would therefore be subject to deduction of income tax
under PAYE, and would be subject to class 1 National Insurance Contributions.
4. The
issue before the tribunal is whether Mr Filipiak was at the relevant times an
employee of the Appellant.
5. The
Appellant was represented by its accountant Mr Saunders and HMRC was
represented by Mr Lewis. We heard evidence from Mr Eric Newman (a director of
the Appellant), Mr Filipiak and Ms Gaynor Leadbeater (the HMRC officer
responsible for the decisions and determinations). We also had before us
bundles of written evidence.
Legislation
6. As
regards national insurance contributions ("NICs"), Section 2 (1)
Social Security Contributions and Benefits Act 1992 defines the phrases
"employed earner" and "self-employed earner" as follows:
" Categories of earners
(1) In this Part of this Act
and Parts II to V below—
(a) “employed earner” means
a person who is gainfully employed in Great Britain either under a contract of
service, or in an office (including elective office) with general earnings; and
(b) “self-employed earner”
means a person who is gainfully employed in Great Britain otherwise than in
employed earner's employment (whether or not he is also employed in such
employment)."
7. Sections
6 and 7 of the same Act set up the circumstances in which Class 1 NICs are to
be paid and who is liable to pay them. Paragraph 3 of Schedule 1 makes the
employer liable to pay the primary (employee's) contribution and sets up the
circumstances in which you can recover the contribution from the employee, as
follows:
"(1) Where earnings are
paid to an employed earner and in respect of that payment liability arises for
primary and secondary Class 1 contributions, the secondary contributor shall
(except in prescribed circumstances), as well as being liable for any secondary
contribution of his own, be liable in the first instance to pay also the
earner's primary contribution or a prescribed part of the earner's primary
contribution, on behalf of and to the exclusion of the earner; and for the
purposes of this Act and the Administration Act contributions paid by the secondary
contributor on behalf of the earner shall be taken to be contributions paid by
the earner.
(2) . . .
(3) A secondary contributor
shall be entitled, subject to and in accordance with regulations, to recover
from an earner the amount of any primary Class 1 contribution paid or to be
paid by him on behalf of the earner; and, subject to sub-paragraphs (3A) to (5)
below but notwithstanding any other provision in any enactment], regulations
under this sub-paragraph shall provide for recovery to be made by deduction
from the earner's earnings, and for it not to be made in any other way."
8. Section
8 Social Security Contributions (Transfer of Functions, Etc) Act 1999 provides:
"Decisions by officers of Board
(1) Subject to the
provisions of this Part, it shall be for an officer of the Board—
(a) to decide whether for
the purposes of Parts I to V of the Social Security
Contributions and Benefits Act 1992 a person is or was an earner and, if so,
the category of earners in which he is or was to be included,
(b) ….
(c) to decide whether a
person is or was liable to pay contributions of any particular class and, if
so, the amount that he is or was liable to pay,"
9. Regulation
10 of the Social Security (Decisions and Appeals) Regulations 1999 SI 1999/1027
places the onus of proof on an appellant in respect of a decision and made
under section 8 above.
10. The Income Tax
(Pay As You Earn) Regulations 2003 (SI 2003/2682) ("the PAYE
Regulations") require an employer to deduct an account for PAYE when
making payments of employment income to an employee. Regulation 80 of the PAYE
Regulations provides:
Determination of unpaid tax and appeal against
determination
(1) This regulation applies
if it appears to [HMRC] that there may be tax payable for a tax year under
regulation 68 by an employer which has neither been—
(a) paid to [HMRC], nor
(b) certified by [HMRC]
under regulation 76, 77, 78 or 79.
(2) [HMRC] may determine the
amount of that tax to the best of their judgment, and serve notice of their determination
on the employer.
(3) A determination under
this regulation must not include tax in respect of which a direction under
regulation 72(5) has been made; and directions under that regulation do not
apply to tax determined under this regulation.
(4) A determination under
this regulation may—
(a) cover the tax payable by
the employer under regulation 68 for any one or more tax periods in a tax year,
and
(b) extend to the whole of
that tax, or to such part of it as is payable in respect of—
(i) a class or classes of
employees specified in the notice of determination (without naming the
individual employees), or
(ii) one or more named
employees specified in the notice.
(5) A determination under
this regulation is subject to Parts 4, 5 . . .and 6
of TMA (assessment, appeals, collection and recovery) as if—
(a) the determination were
an assessment, and
(b) the amount of tax
determined were income tax charged on the employer,
and those Parts of that Act apply accordingly with
any necessary modifications.
(6) . . .
[references to "HMRC" were added in 2008
and have been included for ease of reference]
11. Section 50 (6)
Taxes Management Act 1970 places the onus of proof on an appellant in respect
of a determination made under Regulation 80 of the PAYE Regulations.
Background Facts
12. On the basis of
the evidence before us, we find the background facts to be as follows:
13. Eric Newman
Developments Limited undertakes the business of property development. It buys
properties which it improves or renovates and then sells. It also lets
properties that it has bought and renovated, but which it is unable to sell at
the price it desires, and undertakes maintenance on such properties. Mr Newman
is the principal shareholder and director of the business. Also working in the
business are his son and son-in-law who are both skilled tradesmen (carpenter
and bricklayer).
14. Mr Filipiak
started to work for the Appellant in 2004, shortly after Mr Filipiak came to
the UK from Poland. Prior to coming to the UK, Mr Filipiak had some experience
of construction work in Poland. He needed to work on a flexible basis, as his
mother was in poor health, and he would need to return to Poland to be with her at short notice and for uncertain periods. This arrangement suited the
Appellant, as Mr Newman was running down the business in the light of the
uncertain economic situation and as he wanted to retire anyway. He therefore
could not guarantee regular work and did not want to enter into long term
commitments. It was therefore agreed that Mr Filipiak would be engaged on a
self-employed basis. Mr Filipiak engaged an accountant to prepare his tax
returns, and registered under the construction industry scheme.
15. Included in the
document bundles are copies of the written agreement concluded between the
Appellant and Mr Filipiak. Clause 4 of the agreement provides that the
"Sub-contractor" (Mr Filipiak) shall
a. perform the work in a professional and
businesslike manner in accordance with normal practice and standards of the
trade, by supplying expert and adequate level of personnel and materials
b. use best endeavours at all times to do
all things necessary to comply with the requirements of the Contractor [the
Appellant]
c. indemnify and hold the Contractor harmless
from any claims or liability whatsoever arising from the Sub-contractor's work
under this contract
d. not be entitled to holiday pay, or
sickness pay for any absence for such purposes nor be entitled to any benefits
offered by the Contractor the Contractor's employees
e. be entitled to engage their own staff and
assistance as and when necessary to discharge the Sub-contractor's obligations
towards the Contractor, provided that they shall accept all liability for the
terms of engagement of such staff and assistance, and shall indemnify and hold
the Contractor harmless from any claims or liability whatsoever
f. in respect of all notified deadlines for
parts of the services to be performed, time shall be of the essence
g. be entitled to choose how and when to
carry out the services as long as the performance of such services is to the
satisfaction of the Contractor
h. be responsible for providing their own
equipment and materials whenever appropriate at own cost
i. arrange for and be responsible for the
provision of adequate public liability insurance and provide written evidence
thereof if required by the Contractor
j. be responsible for correcting, without
further charge, any defective or incomplete work as soon as the same is either
discovered by the Sub-contractor or notified to the Sub-contractor by or on
behalf of the Contractor within a reasonable time period
k. be entitled to freely undertake work for
any third party at any time
l. be entitled to negotiate the contract
price and benefit from own good management.
16. Clause 5 of the
agreement provides for prices and charges to be specified on the contract, and
clause 6 provides that any extra supplementary services shall be set out in
writing and attached to the contract.
17. Some doubt was
expressed by Mr Lewis about the provenance of this agreement. Two copies of
the agreement were included in the bundles. Both copies were expressed in
identical terms, but the copies were laid out differently and had different
typefaces. One, provided to HMRC on 13 February 2008 was undated, and the
other, sent to HMRC during the appeals process was dated 1 October 2004, but
gives as an address for Mr Filipiak an address to which Mr Filipiak did not
move until May 2007. The provenance of these agreements is unsatisfactory, and
we place little upon them as evidence of the terms of the agreement reached
between the Appellant and Mr Filipiak.
18. When first
engaged by the Appellant, Mr Filipiak had few skills, and worked as a general
labourer. However over time, Mr Filipiak built up his skills, and can now
undertake basic carpentry, decorating, tiling, plus some labouring and
digging. Mr Filipiak has accumulated basic tools over the period since he
started to work for the Appellant. Initially Mr Filipiak required supervision
from Mr Newman and his other workers, but as Mr Filipiak's skills improved, he
required less supervision, and now largely works unsupervised. Mr Newman and
his son will monitor the quality of Mr Filipiak's work when a particular job is
finished. Mr Filipiak will from time to time ask advice of more experienced
colleagues on how to tackle some aspects of his work. Currently Mr Filipiak is
undertaking largely maintenance work for the Appellant, and will be given keys
to premises where he has to work – and could spend most of the day there
alone. Again Mr Newman or his son would just check the work when he had
finished.
19. Mr Filipiak has
worked almost exclusively for the Appellant. Although both Mr Newman and Mr
Filipiak said in evidence that Mr Filipiak was free to work for others, in
practice, although Mr Filipiak has done some work for others, it has been
insignificant in the context of the overall engagement by the Appellant. Mr
Filipiak has not advertised for customers, and the little work he has done for others
has come from word-of-mouth recommendations. When asked why he did not
actively advertise for other customers, Mr Filipiak replied that it was easier
to work for just one customer with regular money, rather than have one good job
and then have a break with no money whilst waiting for the next job.
20. Both Mr Newman
and Mr Filipiak stated that Mr Filipiak was paid by the job. Mr Newman would
discuss a particular job with Mr Filipiak (such as decorating a room), and Mr
Newman would specify a price for the job. Mr Filipiak was free to either take
the job at the specified price or to turn it down. As and when a job was
finishing, Mr Newman and Mr Filipiak would discuss the next job and agree a
price for it. However neither Mr Newman nor Mr Filipiak documented their
agreement, and no invoice for any particular job was ever produced. When asked
why, Mr Filipiak said that his written English was poor.
21. At a meeting
with HMRC on 13 February 2008, Mr Newman said that his subcontractors work on a
fixed price (the price is set by Mr Newman, and then then mutually agree to
it). The subcontractor is then paid a fixed amount each week, with a balancing
charge on completion. No formal records were kept allocating payments to
particular jobs, although Mr Newman told us that he recorded the price in his
diary (although the diary was not produced in evidence). When Mr Newman was
asked how he knew that he did not over (or under) pay Mr Filipiak for any
particular job, Mr Newman replied that he just knew from his experience in the
business over many years.
22. Included as an
attachment to Mr Newman's witness statement was a schedule of the weekly
payments made to Mr Filipiak during the tax year 2010/11 (although this year is
not under appeal. This shows that Mr Filipiak was not paid a balancing amount
on the conclusion of each job – instead Mr Newman made weekly payments to Mr
Filipiak of a fixed amount each week. In 2010/11, Mr Filipiak worked for 28
weeks. In all but four of those weeks, he was paid £328 for each week worked.
He was paid less in four of those weeks, and we note that there were public
holidays in three of the four weeks in which he was paid less.
23. We find these
explanations unconvincing. Even if Mr Filipiak's command of written English
was poor, we would expect that he would maintain some record in Polish of the
amount agreed for a particular job for his own records. Equally we are
unconvinced by Mr Newman's statement that he "just knew" when Mr
Filipiak had been paid the correct amount for a job. This is reinforced by the
evidence that in 2010/11, Mr Filipiak was consistently paid £328 for each full
week. We find that Mr Filipiak was paid not by the job, but rather an agreed
fixed sum for each full week that he worked.
24. Mr Newman also
told us (and we find) that from time to time he paid Mr Filipiak bonuses if a
job was done particularly well. No specific goals were set in order to be
rewarded by a bonus, it would be down to Mr Newman's discretion.
25. Mr Filipiak
supplied his own hand tools. More substantial equipment was supplied by the
Appellant. Whilst working on the Appellant's properties, Mr Filipiak was
covered by the Appellant's insurance policy.
Legal Analysis
26. "Employment"
is not defined in the tax legislation, and the principles as to whether an
individual is engaged as an employee are derived from general case law.
Fundamentally, the key consideration is whether the individual is in business
on his own account.
27. The courts have
set out various factors which should be considered in any analysis of whether
an individual is an employee, which can be summarised as follows:
(1)
the well-known threefold test set out by MacKenna J in Ready Mixed
Concrete (South East) Ltd v. Minister of Pensions and National Insurance [1968]
1 All ER 433;
(2)
whether the worker is in business on his own account: see in particular
the judgment of Cooke J in Market Investigations Ltd v Minister of Social
Security [1969] 2 QB 173;
(3)
the "mutuality of obligation" test: see the judgment of Park J
in Usetech Ltd v. Young (HMIT) [2004] STC 1671 and Cornwall County
Council v Prater [2006] EW CA Civ 102;
(4)
the "substitution issue": see the decision of the Supreme
Court in Autoclenz v Belcher [2011] UKSC 41 (the decision of the Supreme
Court was released after the hearing, but the decision of the Court of Appeal
was cited to us), the decision of Park J in Usetech (see
above) and the decision of Henderson J in Dragonfly Consultancy Ltd v The
Commissioners for Her Majesty's Revenue & Customs [2008] EWHC 2013 (Ch);
(5)
whether the individual is "part and parcel" of the business;
(6)
the intentions of the parties.
28. It is important
to understand, however, that the courts have warned against a mechanistic
approach to these tests. Each case must be decided on its own individual facts.
The relationship between the parties must be examined in detail in each case.
The factual matrix may mean that some of the factors mentioned above are very
important or even determinative of the nature of the relationship. In other
cases, the same factors will be of little help (or may even be irrelevant) in
determining whether the relationship is that of employment or self-employment.
29. In Hall v
Lorimer 66 TC 349 Mummery J said (at 366G):
"In order to decide whether a person carries on
business on his own account, it is necessary to consider many different aspects
of that person's work activity. This is not a mechanical exercise of running
through items on the checklist to see whether they are present in, or absent
from, a given situation. The object of the exercise is to paint a picture from
the accumulation of detail. The overall effect can only be appreciated by
standing back from the detailed picture which has been painted, by viewing it
from a distance and by making an informed, considered, qualitative appreciation
of the whole. It is a matter of evaluation of the overall effect of the detail,
which is not necessarily the same as the sum of the individual details. Not all
details are of equal weight would importance in any given situation. The
details may also vary in importance from one situation to another."
30. Mummery J's
comments were approved on appeal by Nolan LJ, with whom Dillon LJ and Roch LJ
concurred, (at 375 E-F) who said:
"Mr Goldsmith invited us to adopt the same
approach as that of Lord Griffiths in applying the test or indicia set out by
Cooke J [in Market Investigations Ltd v Minister of Social Security
[1969] 2 QB 173]. That is an invitation which I view with some reserve. In
cases of this sort there is no single path to a correct decision. An approach
which suits the facts and arguments of one case may be unhelpful in
another."
31. Nolan LJ
continued (at 375 I) by expressing approval of the comments of Vinelott J in Walls
v Sinnett 60 TC 150 at 164 where the learned judge said:
"It is in my judgment, quite impossible in the
field where a very large number of factors have to be weighed to gain any real
assistance by looking at the facts of another case and comparing them one by
one to see what facts are in common, what are different and what particular
weight is given by another tribunal to the common facts. The facts as a whole
must be looked at, and what may be compelling in one case in the light of all
the facts may not be compelling in the context of another case."
32. In our view
these comments set out the correct approach to be adopted by this Tribunal in
determining the question whether Mr Filipiak was the Appellant's employee or
whether he was self-employed. The detailed nature of the working relationship
between the parties and all the surrounding circumstances must be examined. The
various factors mentioned above must then be applied to that detailed factual
matrix, with the Tribunal using its judgment to evaluate the weight or
relevance of the factors involved and taking care to look at the picture as a
whole. In the end, there is no one test that can determine every case. The
process, once the facts and circumstances are determined, is one of evaluation
and where mechanical application of the guidance contained in the many decided
cases on this topic is to be avoided.
33. With this
approach, and the reservations of Nolan LJ, in mind we now turn to consider in
more detail the factors of employment considered in the authorities.
The tests of MacKenna J in the Ready Mixed Concrete case
34. MacKenna J set
out his well-known test (at 439) as follows:
“I must now consider what is meant by a contract of
service. A contract of service exists if the following three conditions are
fulfilled: (i) The servant agrees that in consideration of a wage or other
remuneration he will provide his own work and skill in the performance of some
service for his master. (ii) He agrees, expressly or impliedly, that in the
performance of that service he will be subject to the other’s control in a
sufficient degree to make that other master. (iii) The other provisions of
the contract are consistent with its being a contract of service.”
35. . As regards (i)
he said (at 440):
"There must be a wage or other remuneration.
Otherwise there will be no consideration, and without consideration no contract
of any kind. The servant must be obliged to provide his own work and skill.
Freedom to do a job either by one's own hands, or by another's is inconsistent
with a contract of service, though a limited or occasional power of delegation
may not be...."
36. The first test
appears to concern the ability to substitute another person to carry out the
work -- as to which, see below. We describe the second and third tests in more
detail below.
Control
37. The second test
put forward by MacKenna J relates to control by the employer of the employee.
MacKenna J said (at 440):
"Control includes a part of deciding the thing
to be done, the way in which it shall be done, the means to be employed in
doing it, the time when, and the place when it shall be done. All these aspects
of control must be considered in deciding whether the right exists in a
sufficient degree to make one party the master and the other his servant. The
right need not be unrestricted."
38.
It should be noted that in Market Investigations Ltd v
Minister of Social Security [1969] 2 QB 173 Cooke J (at 183) expressed the
view that an analysis of the extent and degree of control was not in itself
decisive.
39. Cooke J then set
out an alternative test, viz whether the person was engaged in business on his
own account, and we consider this test later in this decision.
40. In Dragonfly
Consultancy Ltd v The Commissioners for Her Majesty's Revenue & Customs
[2008] STC 3030 (Ch) Henderson J held that a highly skilled IT system tester
was an employee. The worker in question worked exclusively for the AA number of
periods of several months. Although the worker was not subject to control as to
how the work was done, he was subject to regular appraisal and monitoring.
41. From these
decisions we conclude that control has relevant in determining whether that
person can be characterised as an employee. However, the test is not decisive
and will depend on the degree of control exercised in each case. In Dragonfly
regular appraisal and monitoring over several months were held to be
sufficient. In other cases, e.g. those cases cited by Cooke J in Market
Investigations Ltd, control was not determinative, where other factors pointed
towards self-employment.
In business on own account
42. As we have seen,
Cooke J in Market Investigations rejected control as the decisive test.
The learned judge, in a well-known passage, said (at 185):
“…control will no doubt always have to be
considered, although it can no longer be regarded as the sole determining
factor'. The fundamental question which has to be asked is whether the person
who has engaged himself to perform the services in question is performing them
as a person in business on his own account. If the answer to that question is
'yes', then the contract is a contract for services. If the answer is 'no', then
the contract is a contract of service.”
43. Cooke J said
that there is no exhaustive list which could be compiled of the considerations
which are relevant in answering that question, nor could strict rules be laid
down as to the relative weight which the various considerations should carry in
particular cases. Apart from control, factors, which may be of importance
included
“…are such matters as whether the man performing the
services provides his own equipment, whether he hires his own helpers, what
degree of financial risk takes [sic], what degree of responsibility for
investment and management he has, and whether and how far he has an opportunity
of profiting from sound management in the performance of his task …'
44.
In Lee Ting Sang v
Chung Chi-Keung [1990] 2 AC 374 the Privy Council (in a judgment delivered by Lord
Griffiths) approved the approach of Cooke J in
Market Investigations, saying (see [1990] 2 AC 374 at 382) that 'the matter had never been better put.'
Mutuality of obligation
45. In Nethermere
(St Neots) Ltd v Taverna and Gardiner [1984] ICR 612 the Court of Appeal
referred to the first limb of MacKenna J's three tests referred to above.
Stephenson LJ said (at 623):
"There must, in my judgment, be an irreducible
minimum of obligation on each side to create a contract of service. I doubt if
it can be reduced any lower than in the sentences I have just quoted."
46. In Usetech
Ltd v. Young (HMIT) [2004] STC 1671 Park J said:
“If there is a relationship between a putative
employer and employee, but it is one under which the 'employer' can offer work
from time to time on a casual basis, without any obligation to offer the work
and without payment for periods when no work is being done, the cases appear to
me to establish that there cannot be one continuing contract of employment over
the whole period of the relationship, including periods when no work was being
done. There may be an 'umbrella contract' in force throughout the whole period,
but the umbrella contract is not a single continuing contract of employment.
See Clark v Oxfordshire Health Authority [1998] IRLR 125 (Court of Appeal); Carmichael v National Power PLC [1999] 1 WLR 2042 (House of Lords);Stevedoring & Haulage Services Ltd v Fuller [2001] EWCA Civ 651, [2001] IRLR 627 (Court of Appeal).
That leaves open the possibility that each separate
engagement within such an umbrella contract might itself be a free-standing
contract of employment, and it was, I believe, that concept which the Special
Commissioner had in mind as covering this case. That is consistent with his
referring in the same paragraph of his decision to the decision in Market
Investigations Ltd v Minister of Social Security [1969] 2 QB
173,[1968] 3 All ER 732, in which part time interviewers for a market research
company were held to be engaged under a series of separate contracts of
employment. The judgment of Cooke J in that case contains a valuable and much
cited discussion of principles which are relevant to distinguishing between
contracts of employment and contracts for services rendered in a self-employed
capacity (see especially [1969] 2 QB 173 at 184–185, [1968] 3 All ER
732 at 737–738). I confess that I have doubts about the factual conclusion
which the learned judge reached when he applied the principles to the facts of
the case. For myself, I see considerable force in the alternative analysis,
namely that the interviewers provided their services on a freelance or casual
basis and not as employees. See for an example of an analysis of that nature O’Kelly
v Trusthouse Forte plc [1984] QB 90, [1983] IRLR 369.”
47. In Cornwall County Council v Prater [2006] EW CA Civ 102 the Council
engaged Mrs Prater as a home tutor to teach children who were unable to attend
school. She worked under different engagements for the Council for almost 10 years.
She taught some pupils for five hours a week and others for as much as 10 hours
a week. The duration of the individual engagements varied from a few months to
several years. It was argued on behalf of the Council that there was no
mutuality of obligation because there was no on-going duty to provide work and
there was no ongoing duty to accept work. The Court of Appeal rejected this
argument. Longmore LJ said (at paragraph 43):
"There was a mutuality of obligation in each
engagement namely that the County Council would pay Ms Prater for the work
which she, in turn, agreed to do by way of giving tuition to the people for
whom the Council wanted her to provide tuition. That is to my mind is
sufficient "mutuality of obligation" to render the contract a contract
of employment if other appropriate indications of such an employment contract
are present."
48. With respect,
the ingredients of "mutuality of obligation" stated by Longmore LJ
would be present in any contract for services just as much as in a contract of
employment. Longmore LJ's comment must be understood in the light of the fact
that the alleged absence of "mutuality of obligation" was the
Council's only ground of appeal. Indeed, as Lewison J pointed out (at paragraph
51):
“The question whether there is mutuality of
obligation is not the complete test for determining whether a contract of
service exists. I would have thought that the question of mutuality of
obligation goes to the question whether there was a contract at all, rather
than what kind of contract there was, if a contract existed. However the
alleged lack of mutuality of obligation is the only ground of appeal."
49. We entirely
agree with the comments of Lewison J. Once the "mutuality of
obligation" test is understood as not requiring, in the context of a
series of engagements, the hirer to promise or offer work other than in respect
of each individual engagement, it does not in our view provide much assistance
in determining the question currently before the Tribunal.
Substitution
50. As already noted,
MacKenna J in Ready Mixed Concrete considered that an employee must be
obliged to provide his own work and skill. The ability to do a job "either
by one's own hands or by another's is inconsistent with the contract of
service...." (at 515).
51. In Express & Echo Publications Ltd v Tanton
[1999] EWCA Civ 949 Gibson LJ appeared to suggest that any contract for
services which contained any right for the worker to provide a substitute can
never be a contract of employment. This was doubted by Park J in
Usetech (at 1697) and he said (at 1699):
"As it seems to me
the present state of the law is that whether a relationship is an employment or
not requires an evaluation of all of the circumstances. In the words of Hart J
in Synaptek
Ltd v Young [2003] STC 543, 75 TC 51, para 12, the context is one 'where the
answer to be given depends on the relative weight to be given to a number of
potentially conflicting indicia'. The
presence of a substitution clause is an indicium which points towards
self-employment, and if the clause is as far-reaching as the one in Tanton it may be
determinative by itself."
52. These views of
Park J were endorsed by Henderson J in Dragonfly (at 3061).
53.
Finally, in in Autoclenz v Belcher [2011] UKSC 41 (the
decision of the Supreme Court was released after the hearing, but the decision
of the Court of Appeal was cited to us), we are required to consider whether
the provisions set out in agreement truly reflect the terms of the agreement
reached between the Appellant and Mr Filipiak. The relative bargaining power
of the parties must be taken into account in deciding whether the terms of any
written agreement in truth represent what was agreed and the true agreement
will often have to be gleaned from all the circumstances of the case, of which
the written agreement is only a part. Aikens LJ in the Court of Appeal (whose
approach was approved by the Supreme Court) said the following (at paragraph 91
and 92):
"91. Thus, in cases where there is a
dispute as to the genuineness of the written terms of a contract relating to
work or services, the focus of the enquiry must be to discover the actual legal
obligations of the parties. Speaking for myself, I would respectfully suggest
that it is not helpful to say that a court or tribunal has to consider whether the
words of the written contract represent the “true intention” or the “true
expectation” of the parties. There is a danger that a court or tribunal might
concentrate too much on what were the private intentions or expectations of the
parties. What the parties privately intended or expected (either before or
after the contract was agreed) may be evidence of what, objectively discerned,
was actually agreed between the parties: see Lord Hoffmann's speech in
the Chartbrook case at [64] to [65]. But ultimately what matters is
only what was agreed, either as set out in the written terms or, if it is
alleged those terms are not accurate, what is proved to be their actual
agreement at the time the contract was concluded. I accept, of course, that the
agreement may not be express; it may be implied. But the court or tribunal's
task is still to ascertain what was agreed.
92. I respectfully agree with the view,
emphasised by both Smith and Sedley LJJ, that the circumstances in which
contracts relating to work or services are concluded are often very different
from those in which commercial contracts between parties of equal bargaining
power are agreed. I accept that, frequently, organisations which are offering
work or requiring services to be provided by individuals are in a position to
dictate the written terms which the other party has to accept. In practice, in
this area of law, it may be more common for a court of tribunal to have to
investigate allegations that the written contract does not represent the actual
terms agreed and the court or tribunal must be realistic and worldly wise when
it does so …"
The influence of the surrounding terms
54. The third of
the requirements that MacKenna J listed is essentially that one must finally
look to all the terms, or indeed the notable absence of terms, in order to
judge whether these reinforce or undermine the initial conclusions reached by
applying the first two tests.
55.
The Court of Appeal (Gibson LJ) in Express and Echo
Publications Ltd v Tanton [1999] ICR 693 described the approach to be adopted as follows (at 697):
"(1) The tribunal should establish what were
the terms of the agreement between the parties. That is a question of fact.
(2) The tribunal should then consider whether any of
the terms of the contract are inherently inconsistent with the existence of a
contract of employment. That is plainly a question of law, and although this
court, as indeed the appeal tribunal before us, has no power to interfere with
findings of fact (an appeal only lies on a point of law), if there were a term
of the contract inherently inconsistent with a contract of employment and that
has not been recognised by the tribunal's chairman, that would be a point of
law on which this court, like the appeal tribunal before us, would be entitled
to interfere with the conclusion of the chairman.
(3) If there are no such inherently inconsistent
terms the tribunal should determine whether the contract is a contract of
service or a contract for services, having regard to all the terms. That is a
mixed question of law and fact."
Part and parcel
56. The courts used
to place emphasis on whether an individual was "part and parcel" of
an organisation. However the courts have moved away from "part and
parcel" being considered as a test of employment. We have therefore not given
it further consideration.
Intentions of the parties
57. The status of an
individual as an employee or an independent contractor is a question of law
determined by reference to the facts. The mere fact that the parties have
provided in an agreement that their status is either as an employee or as an
independent contractor is not determinative. MacKenna J in Ready Mixed
Concrete said (at 439) at the beginning of his judgment that “such a
declaration was not necessarily ineffective, for if it were doubtful for what
rights and duties the parties wished to provide, such a declaration might help
in resolving the doubt and in fixing them in the sense required to give effect
to the expressed intention”.
58. In the Dragonfly
case Henderson J (at 3068) said:
"Having dealt at some length with the issues of
substitution and control, I can now deal more briefly with the two remaining
grounds of appeal. The main reason for this, so far as intention is concerned,
is that statements by the parties disavowing any intention to create a
relationship of employment cannot prevail over the true legal effect of the
agreement between them. It is true that in a borderline case a statement of the
parties' intention may be taken into account and may help to tip the balance one
way or the other: see Ready Mixed Concrete ([1968] 2 QB 497 at
513) and Massey v Crown Life Insurance Co [1978] 2 All ER 576,
[1978] 1 WLR 676. In the majority of cases, however, such statements will be of
little, if any, assistance in characterising the relationship between the
parties."
Discussion
Introduction
59. We intend to
examine the various tests or indicia discussed above and then, applying the
guidance of Mummery J in Hall v Lorimer, to stand back and evaluate the
overall picture.
Control by the Appellant
60. When Mr Filipiak
was first engaged by the Appellant, he had little experience of working in
construction, and was under a high degree of supervision and control by the
Appellant. The degree of supervision and control would be suggestive of
employment. As Mr Filipiak's has become more expert, the degree of supervision
and control has declined. It has not been argued that Mr Filipiak commenced
his engagement as an employee, but as his expertise increased he became a
self-employed contractor. The Appellant submits that Mr Filipiak's status has
been one of self-employment throughout. As discussed above, we find that the
test of control is of limited assistance. But to the extent that it provides
any assistance, it is suggestive of employment, given the high degree of
control and supervision exercised when Mr Filipiak was first engaged by the
Appellant, and that his status has been unchanged since then.
Mutuality of obligation
61. As we have
already indicated we consider that "the mutuality of obligation" test
does not provide much assistance. We consider that there was no obligation on
the part of the Appellant to provide work to Mr Filipiak, nor any obligation on
Mr Filipiak to undertake work that was provided. It was clearly recognised by
the Appellant that Mr Filipiak may have to return to Poland at short notice to
be with his sick mother, and would therefore have to be free to be able to
refuse work. It was also recognised by Mr Filipiak when we was initially
engaged that the Appellant would not be able to guarantee Mr Filipiak continual
work, and therefore could not be under a requirement to offer work as
available. The test of mutuality of obligation provides little assistance, in
our view, as to whether Mr Filipiak's engagement is a contract of employment.
We therefore regard this factor as being neutral.
Right to engage substitutes
62. We note that the
copy written agreements included in the bundles contained provisions allowing
for substation of labour. However the provenance of those agreements is unsatisfactory,
and we place no reliance upon those documents as reflecting the terms of the
relationship agreed between the parties.
63. But even if the
copy agreements included in the bundles did genuinely reflect the terms of a
document agreed between the parties, we consider that they do not truly reflect
the terms of the agreement reached between the parties. In particular we place
no weight no the right expressed in the agreement for Mr Filipiak to be able to
delegate or substitute the labour of others. In practice, Mr Filipiak did not
exercise this power and told us that he did not employ anyone as he did not
need anyone. Indeed when questioned about whether he (Mr Filipiak) could get
someone else to carry out his work, he said that he was not sure whether he (Mr
Newman) would trust anyone else to carry out the work. Included in the bundles
of written evidence before use were notes of a meeting between HMRC and Mr
Newman on 13 February 2008 and notes of a meeting and a questionnaire completed
and signed by Mr Filipiak on 14 October 2008 during the course of the meeting
with HMRC. None were challenged, and we find them to be an accurate record of
the respective meetings. At the meeting between HMRC and Mr Newman, he
confirmed that the Appellant would not allow sub-contractors to further
sub-contract their work and send substitutes. Mr Filipiak separately confirmed
that he must carry out his work himself, and that he could not send a
replacement.
64. We find that Mr
Filipiak had little bargaining strength in his relationship with the
Appellant. When he was offered work, it was on a take it or leave it basis. This
is consistent with the notes of the meeting of 8 February 2008, when Mr Norman
said that he set the price at which subcontractors worked for him, and they
either accepted that price or did not do the work.
65. We find that the
provisions in clause 4 of agreement to be window dressing. Although, for
example, clause 4i requires Mr Filipiak to have public liability insurance, in
fact such insurance was provided by the Appellant. Clause 4h requires Mr
Filipiak to provide his own equipment and materials, but in fact all equipment
and materials (other than basic hand tools) were provided by the Appellant.
Although clauses 5 and 6 of the Agreement require the amount payable to Mr
Filipiak to be set out in the agreement, there was never any written record of
the price payable for any "job".
66. Notwithstanding
the terms of clause 4e of the agreement, we find that Mr Filipiak was engaged
by the Appellant to provide his own personal services, and would not be free to
substitute someone else to do his work for him. As regards substitution, we
therefore conclude that the absence of an effective right of substitution is
indicative that Mr Filipiak is an employee.
Whether in business on own account
67. The test of
whether Mr Filipiak was in business on his own account is largely derived from
the judgment of Cooke J in Market Investigations where the following
tests were suggested:
(1)
does the individual provide his own equipment;
(2)
whether he hires his own helpers;
(3)
what degree of financial risk he takes,;
(4)
what degree of responsibility for investment and management he has; and
(5)
whether and how far he has an opportunity of profiting from sound
management in the performance of his task.
68. Own
equipment: Over the period of his engagement Mr Filipiak acquired a set of
hand tools which he used. However all materials and more substantial equipment
was provided by the Appellant. Overall we consider this factor to be neutral.
69. Hiring own
helpers: Mr Filipiak did not engage any helpers. Indeed the evidence is
that it was up to Mr Newman whom he would allow onto a site, and therefore Mr
Filipiak would not be able to engage helpers. We consider that this factor
points towards employment.
70. Degree of
financial risk: We found that Mr Filipiak was paid a week's wage for a
week's work. We conclude that Mr Filipiak was exposed to minimal financial
risk. We consider that this factor points towards employment.
71. Degree of
responsibility for investment and management: In this case, Mr Filipiak has
little or no responsibility for investment and management. Again, we consider
that this points towards employment.
72. Opportunity of profiting from sound management: There is no evidence to
suggest that Mr Filipiak could profit from sound management of a
self-employment business (e.g. in the sense of making efficiencies etc). Mr
Filipiak did not quote fixed prices for particular jobs, and could not juggle
business priorities to maximise his profits. Although Mr Newman paid bonuses
from time-to-time, these were entirely discretionary, and Mr Filipiak could not
arrange his work in a manner that could (with any degree of certainty) attract
a bonus. This factor also points towards employment..
73. Nolan LJ
indicated in Hall v Lorimer that, in the context of a professional
person (by which we take into mean a highly trained or specialised worker) the
duration of engagements and whether the individual was dependent on one engager
should also be considered. In Hall v Lorimer the individual performed a
large number of engagements which lasted on average from one to two days and
was engaged by a large number of different people. We do not consider that Mr
Filipiak is a professional person of the kind described by Nolan LJ, but we
note that he was engaged almost exclusively by the Appellant – apart from
breaks to go back to Poland to be with his sick mother, and more recently from
very few other engagements with third party customers. The fact that there was
only one engager and that Mr Filipiak was therefore financially dependent upon
the Appellant is a factor which, in our view, points towards employment.
74. Standing back,
we note that Mr Filipiak does not invoice the Appellant for payment, and was
paid a fixed amount each week by direct credit to his bank account. He
maintains no business records (other than his bank statements and CIS
records). He does not advertise for customers. These all suggest that he is
not conducting his affairs in a manner consistent with being in business on his
own account, and point towards employment.
Influence of surrounding terms
75. It is usual for
employees to be given benefits such as sick or holiday pay. Their existence is
an indication of employment. Their absence does not however necessarily
indicate self-employment, it may be a reflection of how the parties viewed
their relationship.
76. Mr Filipiak did
not have benefits such as sick or holiday pay. We regard this as a neutral
factor. The terms of the agreement concluded between the parties are clearly
intended to convey the impression that Mr Filipiak is self-employed and that he
is not an employee. In any event, the absence of any entitlement to sick pay
or holiday pay is entirely consistent with the nature of the engagement
envisaged by the parties, which is one where the Appellant was under no
obligation to provide work to Mr Filipiak, and Mr Filipiak was free at any time
to stop work are return to Poland to be with his sick mother.
77. An obligation to
work exclusively for one person may be an indication of employment (although
exclusivity clauses can appear in contracts for services). Both Mr Newman and
Mr Filipiak in evidence stated that Mr Filipiak was free to work for other
customers, although in practice this was done very rarely, and Mr Filipiak
stated that he preferred to work solely for the Appellant. Although this might
be regarded as indicative of self-employment, it is also consistent with an
analysis that Mr Filipiak was engaged under a series of short successive
employment contracts, and that he was free to undertake work for other
customers between the times spent working for the Appellant. Our assessment is
therefore that this is a neutral factor.
Intention of the parties
78. The authorities
indicate that the intention of the parties is not determinative, except perhaps
borderline cases. In our view, in this case, the parties intention was that the
relationship between Mr Filipiak and the Appellant would be one of
self-employment.
Looking at the whole picture
79. Having examined
each factor in turn, we now step back and look at the overall picture in
accordance with Mummery J's guidance and that of the Court of Appeal in Hall
v Lorimer.
80. First, we
consider the control test to be broadly indicative that Mr Filipiak is an
employee of the Appellant.
81. Secondly, the
mutuality of obligation test is neutral.
82. Thirdly, as
regards the right of substitution, we consider that there was no such right and
that this is indicative of employment.
83. Fourthly, as
regards whether Filipiak was in business on his own account the majority of the
tests point towards employment. We therefore conclude that on the "in
business on his own account" test the result is points towards Mr Filipiak
being an employee.
84. Fifthly, as
regards the tests set out by Nolan LJ in Hall v Lorimer, we consider
that nature of the engagements concerned point towards employment..
85. Sixthly, we
consider that the terms of the agreement reached between the parties are
compatible with both a contract of employment and a contract for services in
the sense that it does not preclude each individual engagement constituting
either a contract of employment or a contract for services.
86. Finally, the
intention of the parties is that their relationship should not be one of
employment but rather that Mr Filipiak should be self-employed. We note that
this is the only test that points towards the relationship being one of
self-employment. But it is a factor that only carries weight in the event that
the other tests are inconclusive. As the other tests point towards employment
(or are neutral), we give this factor little weight.
87. Overall, we have
reached the conclusion that Mr Filipiak has at all times been an employee of
the Appellant..
Conclusion
88. We therefore
dismiss this appeal.
89. This document
contains full findings of fact and reasons for the decision. Any party
dissatisfied with this decision has a right to apply for permission to appeal
against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal)
(Tax Chamber) Rules 2009. The application must be received by this Tribunal
not later than 56 days after this decision is sent to that party. The parties
are referred to “Guidance to accompany a Decision from the First-tier Tribunal
(Tax Chamber)” which accompanies and forms part of this decision notice.
NICHOLAS ALEKSANDER
TRIBUNAL JUDGE
RELEASE DATE: 8 February 2012
Cases referred to in skeleton arguments and submissions but
not mentioned in this decision:
Morren v Swinton and Pendlebury Borough Council
[1965] 1 WLR 576
Synapteck Ltd v Young [2003] EWHC 645 (Ch)
Carmichael and anr v National Power [1999] 4 All ER 897
Bank voor Handel en Scheepvaart NV v Administrator of
Hungarian Property (1952) 35 TC 311
Massey v Crown Life Insurance Co [1978] 2 All ER 576
Global Plant Ltd v Secretary of State for Social Services
(1971)
Netherlane Ltd v York [2005] STC (SCD) 305
Byrne Brothers (Formwork) Ltd v Baird [2001] UKEAT 542_01_1809
Stephenson v Delphi Diesel Systems Limited [2003] ICR 471
Parade Park Hotel and anr v HMRC [2007] STC (SCD) 430
MFB Design Services Ltd v HMRC [2011] SFTD 383
Barnett v Brabyn (1996) 69 TC 133
